Tuesday, April 20, 2010

Why should we be concerned that paternalism will foster dependency?

While reading the current discussion of ‘Slippery slopes and the new paternalism’ on Cato Unbound the thought occurred to me that the slippery slopes associated with libertarian paternalism could possibly take us in the direction of libertarianism rather than paternalism. If governments apply opt-out provisions to some existing paternalistic regulations it is possible that many of those who choose to opt out will be so successful in running their own lives that others will follow their example. This could result in political pressure for opt-out provisions to be applied to a wider range of regulation.

Has that train of thought filled me with optimism that citizens will tend to become more self-reliant and less dependent on government in the years ahead? Not exactly! I think widespread acceptance of the view of libertarian paternalists that it is possible for governments to act paternalistically without infringing individual rights is more likely to increase paternalistic regulation than to reduce it. That must follow if we can presume that protection of individual rights has had some influence in restraining the growth of regulation.

I think we should be concerned that increased paternalism will foster increased dependency on government. I see two particular areas of concern, the first of which is probably more manageable than the second.

My first area of concern is the development of cycles of dependency on welfare benefits in which several generations from one family become dependent on government hand-outs as the major source of their income from cradle to grave. This seemed to be a growing problem in the 1980s and 1990s, but increased paternalism in the manner of providing assistance may actually be reducing this problem and preventing it from spreading. Instead of income-support being provided as an unconditional entitlement it is now increasingly provided with conditions that require the beneficiaries to take action that will enable them to support themselves.

I have previously discussed (here) how attaching paternalistic conditions to welfare assistance can be consistent with both freedom and flourishing. If as much publicity is given to some of the ideas in ‘Identity Economics’, the recently published book by George Akerlof and Rachel Kranton, as is being given to the concept of libertarian paternalism, then I think we have grounds to hope that future welfare policies will be developed in the light of a better understanding of the role of identity in influencing behaviour. Policies that encourage people receiving welfare benefits to recognize their potential as productive members of the community are likely to help free them from cycles of dependency on government.

My second area of concern is an increasing tendency for people from all walks of life to look to government to provide protection against all kinds of risks. This has become so prevalent that it is difficult to choose an example to illustrate the point from the huge number available. When I was having breakfast this morning, however, a particularly appropriate example leapt out at me from the pages of ‘The Australian Financial Review’ (20 April). I think the example is particularly appropriate because it shows that even people who have a well-deserved reputation for rationality on public policy issues are now lending their support to proposals for government regulation to protect people who have hitherto been thought of as quite capable of looking after their own interests in the market place.

Tony Harris - a columnist whose views have hitherto generally deserved a great deal of respect – argues that the Australian government’s response to public concerns over executive remuneration has been ‘paltry’. Tony makes clear in his article that he wanted to see the government intervene in the executive pay market to address the problem of pay schemes that enable managers to earn substantial sums in good times, but lose little in bad times. He presents a logical argument that such pay schemes do not do a good job of aligning the interests of shareholders and executives.

The main problem with the article is that the author doesn’t even seem to think it is necessary to attempt to make a case for the government to intervene to protect shareholders in this instance. What is it that prevents major shareholders in public companies from insisting that executive pay packages provide appropriate incentives for executives? What prevents fund managers from taking the incentives provided to executives into account in making investment decisions?

The article doesn’t attempt to answer those questions. I think the answer to both questions is that nothing prevents the market for executive remuneration from working efficiently. The mistakes that have recently been made can be explained by the fact that this is an area where substantial innovation has occurred over the last couple of decades . Investors and fund managers have the strongest possible incentive to learn from this experience. It seems likely that as a result of recent events an increasing proportion of firms will pay executive bonuses in the form of shares that will be vested gradually, but some firms may consider a different approach to be preferable. No case has been made for governments to regulate how remuneration must be paid in all companies at all times.

When even sensible people argue that governments should protect people who are quite capable of looking after their own interests it is time for everyone to be concerned that government paternalism has fostered attitudes of dependency. We have already slid a long way down the slippery slope to dependency on government.

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